In Aquanta Group Inc. v Lightbox Enterprises Ltd, 2022 ONSC 3036, Justice Morgan was asked to appoint an arbitrator when the parties could not agree. The Respondents opposed all arbitrator candidates on the Applicants’ list and requested the appointment of an arbitrator who was previously appointed by the parties in an earlier arbitration involving the same parties and the same agreements. The Respondents argued that this would facilitate costs and time savings by allowing the arbitrator to use his notes from the earlier arbitration because there was no transcript of that arbitration. The Applicants had challenged the award arising from the earlier arbitration and opposed the appointment of the same arbitrator on the basis of reasonable apprehension of bias. Justice Morgan rejected the Respondents’ request to appoint the same arbitrator and found that their proposal, among other things, violated the principle of deliberative secrecy. In the alternative, the Respondents agreed to the appointment of certain candidates on the Applicants’ list. Justice Morgan chose one of those, “resort[ing] to the entirely arbitrary approach of going in alphabetical order”.
The Respondents were the franchisor and assignee of retail cannabis franchises. The Applicants were a franchisee and its assignee (and principals) of the stores, which operated under four separate License Agreements (which were substantially similar) and four separate Services Agreements (which were substantially similar) with the Respondents.
Each of the agreements contained an identical arbitration clause, which provided for any dispute to be submitted to arbitration to be governed by the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, and that if the parties could not agree on an arbitrator, either one could apply to a court of competent jurisdiction for the appointment of a single arbitrator.
In January 2022, the parties engaged in an arbitration (the “First Arbitration”), before an arbitrator (the “First Arbitrator”) appointed on consent of both parties. The First Arbitration focussed on the interpretation and enforceability of the Franchise Agreements. The Respondents were successful in the First Arbitration. The Applicants appealed that result and sought to have the matter sent back to be re-heard by a new arbitrator. That appeal was pending.
On February 14, 2022, after the First Arbitration was concluded, the Applicants delivered a Submission to Arbitration (the “Second Arbitration”) on the following issues: (a) a determination of whether the Franchise Agreements were rescinded by the Respondents’ late disclosure pursuant to 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3; (b) the amount, if any, of compensation due to the Applicants as a result of the rescission pursuant to s. 6(6); and (c) whether any of the Respondents met the definition of “franchisor’s associates” under s. 1(1), which may also be required to pay compensation.
The Applicants proposed several candidates to serve as arbitrator for the Second Arbitration, all of whom Justice Morgan found were highly competent and experienced. The Respondents proposed that the First Arbitrator be appointed, to which the Applicants objected.
The Respondents argued that the First Arbitrator would be more cost and time-efficient because he already knew the franchise business, as well as the commercial relationships and contracts in issue. He was familiar with the Franchise Agreements at issue in a way which no other arbitrator could match.
The Applicants’ arguments against the appointment of the First Arbitrator were: (1) that his knowledge of past dealings, communications and circumstances as between the parties in the First Arbitration led to him making findings, including findings of credibility against key witnesses; (2) that the award he made in the First Arbitration was subject to an appeal; and (3) that other arbitrators they had proposed had greater experience in franchise law.
Justice Morgan dismissed the last argument, because the First Arbitrator was an experienced and well-regarded commercial arbitrator – and the Applicants themselves had appointed him to the First Arbitration.
The first argument was the one most forcefully advanced by the Applicants, who argued that the First Arbitrator’s involvement in the First Arbitration created a reasonable apprehension of bias. As Justice Morgan stated, the issue was perception, rather than actual bias:
“ In making this submission, Applicants’ counsel has referred me to ICP v. JCP, 2018 ONSC 40 (sic). That case dealt with an objection by one party to a highly experienced arbitrator who, like here, had been involved in a previous arbitration among the parties and made findings of credibility adverse to one side. Justice Wilton-Siegel indicated, at para 43, that the arbitrator would no doubt approach the matter objectively, but that a reasonable apprehension of bias existed because of the perception of non-objectivity. That is, the findings of credibility unfavorable to one party suggest that the previous arbitration may influence the credibility determinations in the subsequent arbitration.”
In this case, the Applicants argued that the First Arbitrator had found that their main witness was not credible and had acted illegally by violating regulations pertinent to the cannabis industry. Therefore, a reasonably informed person could conclude that he would not approach the Second Arbitration with an objective mind.
Further, the Applicants submitted that their objection to the First Arbitrator was “self-fulfilling” in the sense that their public objection alone was sufficient to appoint someone else because it risked, “injecting an element of hostility into the ongoing process”, relying upon Axa Insurance v Belair Direct, 2003 CarswellOnt 2992 at para. 4. Justice Morgan rejected this submission:
“ I do not agree that an objection necessarly (sic) injects hostility into the process. Judges and arbitrators are accustomed to taking disagreement in stride. I have no doubt that an arbitrator with [the First Arbitrator’s] experience would approach opposition by counsel or reversal by an appellate court philosophically as part of the law’s intellectual exchange. However, I do agree that arbitration is designed as a consensual process. While agreement cannot always be reached on selecting an arbitraor (sic), a party’s vocal objection to one arbitrator in particular should be taken seriously in determining who will ultimately play the adjudicative role.”
Justice Morgan was most persuaded that the First Arbitrator should not be appointed because of the efficiency arguments made by the Respondents. The Respondents disclosed their intention to challenge the Second Arbitration on the ground that the issues were res judicata – the issue of the rescission under the Arthur Wishart Act could have been and was not raised in the First Arbitration, but in any event was “dealt with implicitly” by the First Arbitrator. The Respondents argued that despite the fact that there were no transcripts from the First Arbitration that could shed light on what was argued and what was not, the First Arbitrator was the only one involved in the First Arbitration who could make reference to his own notes, which made him uniquely qualified for the role of arbitrator in the Second Arbitration. Justice Morgan disagreed and found that these arguments led to the conclusion that the First Arbitrator should not be appointed.
First, if use was to be made of the First Arbitrator’s notes of the First Arbitration, he would have to produce them to the parties and their counsel. This was a violation of the principle of deliberative secrecy, which was a generally accepted principle in arbitration because arbitrators, “must be free to allow their minds to explore various avenues that may or may ultimately find their way into the decision at hand” (para. 20).
Second, the question of res judicata will turn on what the First Arbitrator said in his award, which was an exercise in interpretation to be done by a subsequent arbitrator on an objective basis in the Second Arbitration, not by the First Arbitrator on the basis of his private notes from the First Arbitration (para. 21).
Third, due process required that the award arising out of the Second Arbitration, refer only to the evidentiary record:
“ The commitment to limiting a decision-maker’s reference to the open and transparent evidentiary record is fundamental to due process. As the Nova Scotia Court of Appeal said in Cherubini Metal Works Ltd v Nova Scotia (Attorney General), 2007 NSCA 37, at para 14, it is also “necessary to help preserve the independence of decision-makers, to promote consistency and finality of decisions and to prevent decision-makers from having to spend more time testifying about their decisions than making them.”
 Once an adjudicative decision is rendered and the decision-maker is functus, the decision must stand, and be interpreted, on its own strength. That approach is essential to the finality and applicability of decisions: Reekie v Messervey, 1990 CanLII 158 (SCC),  1 SCR 219, 222-23. It is contrary to our legal system’s understanding of reasoned adjudication to elevate the authority of a decision-maker above others in the way suggested by the Respondent’s (sic) approach. A repeat adjudicator may sound like an efficient way to go, but not if the parties perceive the repetition as giving that adjudicator unique, and thus virtually infallible, authority.
Therefore, Justice Morgan granted the Applicants’ application and appointed an arbitrator on the list to which the Respondents agreed if they were not successful in having the First Arbitrator appointed. Since Justice Morgan viewed all the candidates on the list as “excellent choices”, he “resort[ed] to the entirely arbitrary approach of going in alphabetical order”.
First, this appears to be another case in which the parties’ decision to save costs created difficulties in the proceedings later on. Here, the parties agreed not to have transcripts prepared of the First Arbitration proceedings, which became problematic when the Respondents sought to raise a res judicata argument in the Second Arbitration. This is a reminder of the potential pitfalls of eliminating or shortcutting the regular procedural safeguards to save costs. See previous case notes on this subject: B.C. – court qualifies parties’ agreement to require only summary reasons as “penny-wise and pound-foolish” – #381 and Québec – Consideration of scope and applicability of arbitration clause – #545.
Second, Justice Morgan did not decide on this application whether the circumstances gave rise to a reasonable apprehension of bias on the part of the First Arbitrator. Pursuant to s. 13(1) of the Ontario Arbitration Act, 1991, S.O. 1991, s. 17, a party may challenge an arbitrator on the ground that “circumstances exist that may give rise to a reasonable apprehension of bias”. Section 11 requires that, “an arbitrator shall be independent of the parties and shall act impartially”. In international law, this same duty is recognized broadly, but the language of the test that is required to disqualify an arbitrator for failure to meet this duty varies. Nonetheless, there is an invaluable resource that assists arbitrators to determine when they have a duty to disclose circumstances that could give rise to a challenge on the basis of lack of independence or impartiality, which parties may rely upon to challenge an arbitrator, or which courts may rely upon to remove an arbitrator. See the IBA Guidelines on Conflicts of Interest in International Arbitration. The circumstances in this case appear to fall within the “Waivable Red List” (Part II, Art. 2.2.1 – the arbitrator had a prior involvement in the dispute). For an Ontario case in which the IBA Guidelines on Conflicts of Interest in International Arbitration have been applied to determine an application to disqualify an arbitrator on the ground of reasonable apprehension of bias see Telesat Canada v Boeing Satellite Systems International, Inc., 2010 ONSC 4023, paras. 153 to 161.